Valeant rallies support with key refi

NEW YORK, March 10 (Reuters) - Valeant Pharmaceuticals has taken advantage of a welcoming US leveraged market to refinance, repay and extend the maturity on its creaking US$30bn debt pile with a mix of new loans and bonds as the troubled Canadian drugmaker’s equity price remains under pressure.

The deals will allow Valeant to complete a critical maturity extension which will push the maturities on three existing loans to 2022, and remove two covenants, after debt investors gave the struggling company a much-needed vote of confidence.

Valeant asked lenders to remove two covenants: a key interest coverage ratio test, which has been under pressure since the company’s equity price collapsed, and a secured leverage ratio requirement.

“They are taking advantage of market technicals. It’s a troubled company stripping all the covenants,” an investor said.

The deadline on the US$3.06bn loan, led by Barclays, was brought forward on Thursday (at the time of writing it was expected to be finalised on Friday afternoon New York time), and the covenants are expected to be dropped on outstanding loans after strong demand for the new deal, a banker said.

The high-yield bond was increased to US$3.25bn from US$2.5bn on the same day in another sign that debt investors are taking a more positive view of Valeant’s prospects than their equity counterparts.

Valeant’s stock price has dropped more than 95% - from more than US$250 per share in mid-2015 to below US$12 per share last week - after the company attracted fierce political pressure for increasing drug prices and an undisclosed relationship with speciality pharmacy Philidor.

The company’s loans have fared better. They hit a low of around 93% of face value in February 2016, but recovered to par in August and have been trading at just under 101 since then.

Valeant raised US$2.12bn in January from the sale of three medicated skincare products to L’Oreal and repaid around US$1.1bn of loans.

Moody’s rates the company’s outlook as negative but affirmed its B3 rating, in part thanks to the completion of the refinancing on March 6.

The ratings agency cited the company’s ability to access the debt markets as positive, along with its recent debt repayment, adding that the debt maturity extension was more critical than covenant relief as banks have been broadly supportive to date.

The company’s ability to adjust its covenants, however, gives it greater flexibility and removes the prospect of default.

Removing the interest cover ratio, which has been under pressure due to declining earnings in a rising interest rate environment, was more important than dropping the secured leverage ratio, a banker said.

Both covenants are assessed relative to Ebitda, which Valeant said would be US$3.55-$3.7bn this year, a significant decline from US$4.3bn in 2016.

“The underlying trends are still a bit pressured, but our sense is that pressure is less than it has been,” said Michael Levesque, a senior vice-president at Moody’s.

VALEANT EFFORT

The new US$3.06bn loan will be added on to Valeant’s existing term loan F. The maturity of three separate term loan Bs will be extended to the April 2022 maturity date of the TLF, while an existing revolving credit facility will be extended to 2020.

Pricing on the three existing term loan Bs (425bp-450bp) will be increased to 475bp over Libor to match the existing term loan F, in return for the covenant concessions.

The upsized US$3.25bn secured high-yield bond was split between two tranches: a US$1.25bn five-year priced at 6.5% and a US$2bn seven-year priced at 7%.

Issuing secured notes allowed the company to raise funds at much cheaper rates than in the unsecured market, where some of Valeant’s other junk bonds still trade at yields above 10%.

By increasing the amount of secured debt it can issue, Valeant may have brought some relief to holders of short-dated unsecured bonds, which can be more easily refinanced, but holders of longer-dated paper may have fewer reasons to cheer, according to some.

“Long unsecured bonds will see potential recovery in a bankruptcy lowered because there is now more debt ahead of them,” said one high-yield investor.

The bond will repay up to US$1.1bn of Valeant’s 6.75% notes due in 2018 and all outstanding term loan A debt, which stood at US$1.7bn at the end of last year, according to regulatory filings.

TOO MUCH, TOO SOON?

Some, however, were critical of Valeant’s decision to rush to the bond market now.

Vicki Bryan, an analyst at Gimme Credit, calculates the company is spending an extra US$18m to tender the notes now as opposed to waiting until August, when they can be called at par.

In a note to clients on Thursday, she argued this may be due to further deterioration in revenue and profits against management expectations, which could make future refinancings more challenging.

Red-hot investor demand for deals with relatively high yields – even so-called story credits – has undoubtedly helped Valeant to get the loan deal over the line at a time of low deal flow.

“Nobody is delighted with covenant stripping, but the company had to do something. There is a substantial amount of asset coverage and with that kind of coupon, in this market, you don’t want to lose that paper,” a loan trader said.

The size of Valeant’s US$30bn debt pile makes it a key component in debt indices, which also ensures that lenders are inclined to be supportive.

“It’s an index name so it’s hard to ignore,” said another investor. “We’ll probably end up doing it.”